BILL ANALYSIS
SENATE COMMITTEE ON INSURANCE
Senator Jackie Speier, Chair
SB 620 (Scott) Hearing Date: May 7,
2003
As Amended: April 29, 2003
Fiscal: Yes
Urgency: No
SUMMARY
Would establish new standards related to advertising, sales
practices, training of insurance agents, and other
specified activities carried out in the sale of annuities
to senior citizens and in the sale of investments in
viatical settlements to seniors.
DIGEST
Existing law
1. Imposes, generally speaking, a special duty of
honesty, good faith, and fair dealing on an insurer,
broker, agent, and all others engaged in the
transaction of insurance with a prospective insured who
is 65 years of age or older;
2. Authorizes the Insurance Commissioner (IC) to assess a
penalty for violation of this duty;
3. Establishes a 30 day "free look" period following the
purchase of an individual life insurance product or an
individual annuity contract by a senior citizen, during
which time the senior is entitled to return the policy
or contract and to receive a refund of all premiums and
fees;
4. Regulates viatical settlements, as defined, and imposes
certain requirements on a person entering into or
selling viatical settlements;
This bill
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1. Would enact additional restrictions on advertising
practices that target seniors;
2. Would expand the scope of existing restrictions that
apply to deceptive or misleading sales or
advertisements of disability insurance to seniors 65 or
older to include viatical settlements and annuity
products;
3. Would prohibit advertisements for the sale of insurance
products to seniors from including specified terms,
including "seminar," "class," "informational meeting,"
without disclosing that the purpose of the meeting is
to facilitate sales;
4. Would prohibit advertisements to seniors from including
a professional designation unless the designation is
conferred by an accredited college or university or
conferred by a long-standing professional trade
organization that is nonprofit and not controlled by
founding individuals;
5. Would require that license information be displayed
next to, and in the same font as, any professional
designation;
6. Would establish a rebuttable presumption that the
issuance or delivery of a deferred annuity to a senior
is unsuitable under certain circumstances;
7. Would require that an issuer of annuities develop a
suitability plan for its agents to use when selling
annuities to seniors;
8. Would require the IC, upon a finding that an annuity
sold to a senior was unsuitable, to order the insurer
to rescind the annuity contract, return the premium,
and pay 10% interest per annum on the deposit amount,
and all fees and costs. Additionally, the IC or court
would be able to levy a penalty equal to half the
deposit amount;
9. Would prohibit insurance agents, brokers and solicitors
who are not attorneys from sharing commissions or other
compensation with attorneys who are not insurance
agents;
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10. Would require specific training and continuing
education for producers to sell annuities;
11. Would revise the disclosure requirements applicable to
the sale of life insurance and annuity products to
seniors;
12. For contracts originated on or after January 1, 2004,
would prohibit insurers from investing the premium from
the sale of a variable annuity contract, variable life
insurance contract or modified guaranty contact during
the free look period, unless the senior (defined as age
60 + in this section of the code) signs a waiver
permitting investment during the free look period;
13. Would declare that a contract in #8 is void at
inception if returned within the free look period, but
if a waiver is signed and the money is invested, then
the senior would be entitled to a refund of the
account's value and any policy fee;
14. Would declare all policies of individual life insurance
and all annuities in effect as of January 1, 2003 to be
in compliance with the new requirements (grandfather
clause);
15. Would clarify that certain disclosures about surrender
periods and penalties, and the length of any deferral
period must be made prior to selling any life insurance
product or annuity contract to a senior citizen
(defined as age 60 and older in this part of the
existing law);
16. Would specifically require that a senior (age 60 +) be
given, and sign, a disclosure of the following:
a) Surrender charges;
b) Length of deferral period;
c) Fact that the agent will earn a
commission, and a variety of factors that
may affect the commission;
d) Tax consequences of the sale of
specified investments used to purchase the
life insurance policy or annuity;
e) Statement that the senior should
consult an independent expert regarding
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legal and tax issues of purchasing an
annuity or using the annuity to qualify for
Medi-Cal;
f) Free look period;
g) A statement encouraging the senior
to contact existing insurers about the costs
of surrendering existing policies;
17. Would impose restrictions on the sale of annuities and
insurance settlements in the home of a senior (age 65
+), including a requirement to deliver to the senior's
home, 24 hours in advance of the meeting, a notice
stating that the meeting can be cancelled, the right of
a senior to have others present during the sales
presentation, phone numbers for the Department of
Corporations, and other specified information;
18. Would prohibit agents from making any statement, other
than a greeting, before informing the senior (age 65 +)
of the name of the agent, name of the insurer, and that
a life insurance product or annuity may be offered,
other specified information, and would also require the
display of identification to the senior;
19. Would make "unnecessary replacement" of an annuity, as
defined, a violation of the insurance code;
COMMENTS
1. Purpose of the bill . According to the author, SB 620
is a comprehensive bill aimed at reforming the sale of
annuities and other specified products to seniors.
2. Support . The author states that testimony at the
February 27th hearing before this committee, "Financial
Planning or Fleecing of Seniors: Insurance Products
and Investments," revealed that some advertising to
seniors is misleading. For example, seminars for
financial planning are often held at senior centers or
through church groups. Seniors who attend often have
no idea that the purpose of the seminars is to develop
sales leads for insurance products. SB 620 would
require that they be informed in advertisements that
the purpose of the event is to develop sales leads.
Professional titles are proliferating, and these
further confuse seniors (and perhaps all buyers)
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regarding the competence of the sales representative to
offer advice about complex legal, tax and insurance
issues. SB 620 would permit only certain types of
professional credentials to be used in a presentation
to seniors. The author is deeply concerned about
whether certain types of insurance products are even
suitable for sale to seniors. For example, and as
evidenced during the February hearing, some seniors are
sold products with steep surrender charges and these
may be inappropriate for a person who could confront
sudden and high medical costs due to deteriorating
health.
Testimony during the hearing from one deputy district
attorney demonstrated that even when a senior is
defrauded and the problem uncovered within days, the
amount owed is still difficult to determine and the
insurer may not have the funds available to readily
remit. Thus, insurers should be prohibited from
investing funds during the 30 days free look period,
absent informed approval by the senior.
The California Advocates for Nursing Home Reform
(CANHR) believes that SB 620 is needed because every
year thousands of California's senior citizens are
responding to misleading advertisements and sales
pitches purporting to offer expert advice, but instead
are left with substantial financial losses and their
estate planning objectives turned upside down. "SB 620
enacts restrictions in advertising practices,
establishes a much-needed requirement for product
suitability, and raises the education and ethics
standards for insurance sales agents."
The Gray Panthers generally agree with the statements
set forth by CANHR.
3. Opposition . The Association of California Life &
Health Insurance Companies (ACLHIC) believes that the
bill contains many unworkable "suitability"
requirements. These should be further debated by the
National Association of Insurance Commissioners before
legislative action is taken. In addition, the
rebuttable presumption against the sale of any deferred
annuity to a senior age 65 or older would deprive these
consumers of valuable financial protection.
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ACLHIC suggest that the presumption of unsuitability be
dropped from the bill or modified to apply only to
persons 75 years of age or older. ACLHIC also wants
the supplemental application requirements dropped from
the bill (generally speaking, page 5, lines 13 - 34).
ACLHIC wants section 10127.18 (regulation of home
visits) stricken from the bill. Other industries aren't
required to take these steps, and these provisions are
going to cause confusion about what should happen if
the meeting is held in the agent's office rather than
at the senior's home. ACLHIC developed several other
proposed changes to the bill and will be available to
explain those to the committee.
Oppose unless amended . Variable Annuity Life Insurance
Company (VALIC) Financial Advisors believes that the
bill has many positive provisions dealing with abusive
sales practices, including sections dealing with
training and disclosure requirements. VALIC objects to
the presumption of unsuitability of a deferred annuity
to a senior. From VALIC's perspective, there are
numerous burdensome procedures that would be required
if a sale to a senior were contemplated, and these
procedures would substantially raise the delivery costs
of insurers, thereby lowering the rate of return that
the insurer is able to pay to a senior. VALIC urges a
more "targeted approach" to the problem, and encourages
the author to wait for NAIC suitability
recommendations.
The California Coalition of Insurance Professionals
(CCIP) also lauds most sections of the bill, and
opposes the presumption of unsuitability. CCIP notes
that an immediate annuity with a guaranteed income for
life at a favorable interest rate may be an important
investment option for seniors. A deferred annuity also
offers a valuable choice for seniors, although if the
annuity might be surrendered then it might not be
appropriate. "When suitability and planning are
observed, the results of the sale of deferred annuities
to seniors can be very positive." Compared to a CD,
for example, a senior can allow interest on a deferred
annuity to accrue tax fee, can still withdraw up to 10%
of the invested amount annually with no penalty, and
the surrender charge is eliminated after 5 years. This
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scenario happens much more frequently than the
unsuitable sales scenario, according to CCIP. CCIP
also notes that SB 620 doesn't provide an agent with a
"safe haven" because the bill doesn't establish
suitability standards. CCIP also opposes the bill's
provisions restricting the use of professional
designations. CCIP will probably propose language that
it would like to see, allowing training organizations
approved by the IC.
Nationwide Financial Enterprise (NFL), Insurance Agents
and Brokers Legislative Council (ABL), and the Life
Settlement Institute (LSI) all oppose specific
provisions of the bill. Abuses in the purchase of
viatical settlements are already being addressed
through a two year bill, AB 1103 (Laird). These three
opponents object to the late addition of this topic to
the bill and ask that the author wait for the DOI and
Assemblymember Laird to develop a "comprehensive scheme
to regulate insurance settlements." These opponents
also believe that the abuses highlighted by the author
do not occur amongst all the products identified in the
bill-life insurance settlements/viaticals, annuities,
life insurance. "The bill should be 'narrowed' to deal
only with the fraudulent sale of annuities through
misrepresentation to seniors-the main abuses cited by
the author.
NFL, ABL, and LSI express particular concern about the
addition to law of a "special duty of suitability to
seniors" (page 4, starting at line 27 and continuing
onto the next page). The creation of a special duty,
the presumption that deferred annuities are unsuitable,
and the newly required and yet "vague" suitability plan
will spawn excessive litigation and are simply
"unworkable." Opponents have numerous objections to
language in the bill, and propose technical amendments
as well. Presumably, they will make these detailed,
lengthy objections known to the committee during the
hearing.
BACKGROUND
On February 27, 2003, the Senate Insurance Committee
held a hearing entitled, "Financial Planning or
Fleecing of Seniors: Insurance Products and
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Investments."
According to the committee background report, during
the past five years, the California Department of
Insurance (DOI) has received approximately 2500
complaints and inquiries that pertain to annuity
products. DOI figures indicate that 25% of the
complaints have involved senior citizens. However,
cases involving seniors probably make up a much higher
percentage of the complaints because DOI does not
always identify the age of the complainant, and victims
do not always disclose their age.
At the February hearing, the committee heard about
complex, lengthy legal actions by deputy district
attorneys and through private counsel to recover funds
from unsuitable investments sold to seniors. Reliance
upon friends, churches, misleading advertisements, high
pressure, in-home sales tactics, and steep surrender
charges combined to deprive victims of funds needed to
pay for health care, housing and other essentials.
Additional, significant information generally discussed
during the February hearing is available at the
committee web site at:
www.sen.ca.gov/htbin/testbin/seninfo_dated?sen.committee
.standing.insurance.info_hearings.backgrounds .
It should also be noted that the committee has not
discussed, in depth, the role of the California Life
and Health Insurance Guarantee Association (CLHIGA) in
assuring consumers about the safety of their
investments. To the degree that agents and brokers try
to assure seniors that some risky investments are "just
like a CD," this is not true if the investment is
guaranteed by the fund. The fund, generally speaking,
only offers a partial repayment of the lost investment
if the insurer becomes insolvent. The formulas are
complex, but the amount that CLHIGA would pay is often
only known after an analysis done as part of the
insolvency process.
QUESTIONS
1. Given the amount of money, time and energy
expended by district attorneys and others to recover
money for seniors who have been misled in the purchase
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of annuities and other similar products, should the
state establish significantly greater protections for
this segment of the population than exist under current
law?
2. Fear about the cost of nursing home care is often used
by sales agents to convince seniors that they can
become Medi-Cal eligible for nursing home care, and
still pass along substantial assets to heirs, using
some types of insurance products. If regulations are
revised as expected, recovery of assets may occur in
the future. If this bill passes, will the potential
recovery of assets invested in annuities and other
products be explained to seniors?
3. Will annuities and other investments deemed
presumptively unsuitable pursuant to this bill be sold,
as a practical matter, to seniors should this bill pass
as presented?
4. Is it fair to seniors to deny them the opportunity to
transact insurance and make investments in the same
products generally available to the broad public?
5. Are investments in viatical settlements of such a
different nature, or the problems in this market so
different, that they should be excluded from a bill
that otherwise focuses on life insurance, annuities and
guaranteed investment contracts?
6. In Section 10127.18, the author proposes to require
several new steps before sales can be made in a
senior's home. Will agents, wishing to avoid these
extra steps, simply move high-pressure sales into the
office of the agent? If so, would this defeat the
purpose of Section 10127.18.
AMENDMENT
1. On page 4 at line 33, strike the word "the" before the
word annuity and insert "any," in order to clarify the
intent of the author, and provide a citation to the
definition of the "community spouse resource
allowance" in order to clarify the text.
RELATED LEGISLATION
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SB 618 (Scott): Would authorize the Insurance
Commissioner (IC) to suspend or revoke an insurance
agent's license if the agent induces the client to
make the agent a beneficiary under specified insurance
policies or in the client's will.
AB 1103 (Laird): Would create new standards for the
sale of viatical settlements to investors, including
written disclosures, standards for sellers, net
penalties, etc.
Prior Pertinent Legislation :
AB 489 (Figueroa), Chapter 440, Statutes of
1997, provides that
a person with a terminal illness has a right to
make an absolute
assignment for value of his or her interest in
life insurance.
SB 1137 (Kopp), Chapter 278, Statutes of 1997,
requires life and
disability insurance agents in the business of
viatical
settlements to be regulated by the IC.
POSITIONS
Support
Gray Panthers
California Advocates for Nursing Home Reform
Oppose
Association of California Life & Health Insurance Companies
Oppose Unless Amended
Coalition of California Insurance Professionals
Nationwide Insurance Enterprise
Insurance Agents and Brokers Legislative Council
The Life Settlement Institute
VALIC Financial Advisors
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Consultant: Brian Perkins 916-445-0825